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COLLECTED WISDOM™ on 401k Hardship Withdrawals

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Hardship distributions are a valuable component of many 401k retirement plans. They encourage participation in the plan and provide a sense of security to participants as they seek a balance between retirement savings and current financial needs. But plan sponsors need to know the rules and administer hardship withdrawals carefully.

Hardship Withdrawals: An Overview

Abstract: A good basic overview on the issue and rules.

Source: 401khelpcenter.com

401k Hardship Withdrawals Can Be Hard on HR

Abstract: Requests by 401k plan participants to take hardship distributions from their accounts can turn into an administrative hardship for HR plan administrators, but there are ways to make handling these requests work, both for employees and benefit managers.

Source: Shrm.org, October 2015

Reducing Leakage to Keep Participants on Track for Retirement

Abstract: Article addresses two ways participants might empty their retirement asset pool and steps that a plan sponsor can take to help prevent participants from negatively affecting their retirement readiness. The two ways are: hardship distributions and distributions after a participant separates from employment.

Source: Pension-Consultants.com, October 2015

IRS Says Self-Certification for Hardship Distributions Not Allowed

Abstract: The IRS recently warned plan sponsors that plans may not authorize hardship distributions based on self-certification of hardship needs by participants. The agency also reminded plan sponsors that it is ultimately their responsibility to ensure that their plans are being administered properly, even if they outsource defined contribution plan recordkeeping to a third-party administrator.

Source: Towerswatson.com, June 2015

Documentation Hardship for Hardships (and Participant Loans, Too)

Abstract: At the present time, it may be impossible for many recordkeepers to transfer the hardship and loan documentation in electronic format to the plan sponsor. But every plan sponsor should probably request it from the recordkeeper and request that the electronic data be transmitted to the plan sponsor with each future hardship distribution and each participant loan.

Source: Benefitsbryancave.com, May 2015

Experts Say Hardship Self-Certification Was Never Allowed

Abstract: The Internal Revenue Service recently issued a publication about appropriate documentation retirement plan sponsors should keep for participant hardship and loan requests. Some industry groups and providers say a recent IRS publication goes against prior guidance, but experts at the ASPPA Virtual Conference disagree.

Source: Plansponsor.com, May 2015

Documentation for Loans and Hardship Withdrawals Must Be Retained

Abstract: Most sponsors of defined contribution plans rely on a third-party administrator to handle participant loans and hardship withdrawals -- typically through the TPA's website. However, in guidance issued last week, the IRS cautions that the sponsor -- not the TPA or the participant -- is responsible for maintaining documents proving that those transactions comply with the law.

Source: Benefitsinbrief.com, April 2015

Required Loan and Hardship Distribution Documentation

Abstract: Does your U.S. retirement plan make distributions to foreign persons? If so, you must generally withhold 30% from a plan distribution paid to a foreign payee unless you can reliably associate the payment with valid documentation that establishes the payee is a U.S. person or a foreign person entitled to a rate of withholding lower than 30%. Here is an overview of the rules.

Source: Irs.gov, April 2015

Stay Compliant on 401k Hardship Withdrawals

Abstract: The government is concerned about the problem of leakage from employer-provided retirement plans, and hardship withdrawals are a big sources of leakage. As a result, it appears the Department of Labor and IRS may be cracking down on plans that do not follow strict requirements for authorizing permitted hardship withdrawals.

Source: Benefitspro.com, February 2015

Hardship Distributions From 401k Plans

Abstract: Hardship distributions are a valuable component of many 401(k) plans, but authorizing plan distributions that do not satisfy the IRS hardship requirements can result in plan disqualification and adverse tax consequences for the participants and the plan sponsor. This article is a close-up look at the rules concerning hardship distributions.

Source: Markleyactuarial.com, October 2014

Casualty Hardships: A Review

Abstract: One of the six 401k hardship withdrawal safe harbor reasons is for casualty losses to a participant's principal residence. Since this is a relatively recent addition to the safe harbor reasons, and because there seem to be more and more storms causing damage to principal residences, it's a good time review and understand the subject.

Source: Mhco.com, May 2014

Hardship Distributions

Abstract: It's natural to feel bad when someone is in need. However, authorizing a plan distribution that does not meet the requirements can disqualify the entire plan and lead to adverse tax consequences for plan participants and for the plan sponsor. It is important for sponsors to understand the hardship rules and to have procedures in place for making distributions and documenting a participant's need in a manner that will satisfy the IRS in case the plan is chosen for examination.

Source: Kravitzinc.com, January 2014

Hardship Distributions and Compliance

Abstract: Retirement plans are not required to provide hardship distributions. However, many profit sharing plans, including 401k plans, do. If a participant in a plan with a hardship provision has an immediate and heavy financial need, and the need matches the plan’s definition of hardship, the participant may be eligible for a distribution. Here is an overview of the rules and some compliance tips.

Source: Unitedretirement.com, December 2013

Grab the Money and Run? Retirement Plan Loans and Hardship Distributions

Abstract: This is 23 slides prepared by the IRS, and used at the 2013 Nationwide Tax Forum, which provide an overview of 401k loan and hardship withdrawal regulations. Topic include: tax rules for plan loans and hardship distributions, tax consequences, loan defaults, and prohibited transactions.

Source: Irs.gov, November 2013

Hurricane Sandy Victims Can Take Hardship Distributions

Abstract: The IRS announced that it will allow taxpayers who have been adversely affected by Hurricane Sandy to take hardship distributions or loans from their retirement plans (Announcement 2012-44). To qualify under the announcement, hardship distributions made on account of a hardship resulting from Hurricane Sandy must be made on or after Oct. 26, 2012, and no later than Feb. 1, 2013.

Source: Journal of Accountancy, November 2012

Hardship Distributions and Headaches Down the Road

Abstract: Today, more and more participants are requesting hardship distributions from their 401k plans in an effort to make ends meet. While you no doubt want to comply with their requests, you don't want to do so to the detriment of your plan. It's critical to understand what the law allows and to review your plan's hardship distribution procedures in order to avoid the headaches that will result from impermissible hardship distributions.

Source: Chang, Ruthenberg & Long PC, May 2012

Diversity and Defined Contribution Plans: Loans and Hardship Withdrawals

Abstract: In a sample of seven large defined contribution (DC) plans, blacks and Hispanics were more likely to take a loan or hardship withdrawal than whites or Asians. Yet the fraction of savings "at risk" through loans was only slightly higher for blacks and Hispanics and, in the case of hardship withdrawals, was actually lower for blacks.

Source: Vanguard, April 2012

The High Cost of 401k Hardship Withdrawals

Abstract: Many who remain employed turned to their retirement plans and a hardship withdrawal to help ease their financial burdens. As this trend continues, it is important for both those working with participants, as well as participants themselves, to be fully aware of what is at stake when hardship withdrawals are considered.

Source: Milliman, March 2012

Understanding Hardship Distributions

Abstract: Hardship distributions are allowed in 401k and 403(b) plans only when specific criteria are met. The IRS specifies that the distribution is required to satisfy a financial need that is characterized as "immediate and heavy." This article provides an overview of the rules.

Source: WithumSmith+Brown PC, February 2012

Participant Hardship Request Form

Abstract: This is a sample participant hardship request form.

Source: Plan Design Consultants, January 2012

Growth in Hardship Withdrawals Slows

Abstract: Among plan participants who took some type of savings action during Q3 2011, 72% took a positive action (started or increased contributions), Bank of America Merrill Lynch reported.

Source: Planadviser.com, November 2011

Best Practices for Reducing Loans, Hardship Withdrawals, and Impulsive Investment Decisions

Abstract: Negative behaviors such as using the 401k plan as an emergency fund instead of a long-term retirement savings account and taking excessive loans and hardship withdrawals is a symptom of a bigger problem among the employee population. The same is true for impulsive investment decisions that could ultimately delay employees' retirement. A combination of plan design and financial education works well to improve employees' financial wellness by casting a wider net in order to help employees help themselves without feeling pushed.

Source: 401khelpcenter.com, October 2011

Examine Loans and Withdrawals in the Right Context

Abstract: Data widely reported in the industry media on loans and withdrawals from 401k plans have generated quite a buzz among plan sponsors. Some reports in recent months characterized participant loan and withdrawal activity as being at "record levels." However, a Vanguard analysis of loans as well as in-service and hardship withdrawals tells a different story.

Source: Vanguard, December 2010

Hardship Distributions: Lost Retirement Savings or Safety Valve for Employees?

Abstract: Hardship distribution provisions in 401k plans used to be one of those matters on which plan sponsors didn't spend a whole lot of time. But because of the economy, that's not the case anymore. As a result, two points of view about hardship distributions have evolved.

Source: Employee Benefit News (free registration may be required), February 2010

Loans Vs. Hardship Withdrawals: Penalties And Taxes

Abstract: There are three ways that cash can be taken out from a 401k account: A regular 401k loan, hardship or non-financial hardship withdrawal. Each is explained in this article with the applicable provisions.

Source: Istockanalyst.com, November 2009

FAQs Regarding Hardship Distributions

Abstract: This FAQ is provided by the IRS as a general guide and overview regarding hardship distributions from 401k plans.

Source: IRS, April 2009

Hard Times Mean More 401k Hardship Distributions

Abstract: Hardship distribution provisions in 401k used to be one of those retirement plan matters on which plan sponsors didn't spend a whole lot of time. Lately, however, that's not the case.

Source: Retirement Plan Blog, April 2009

Hardship Withdrawals and the Mortgage Crisis

Abstract: Hardship withdrawals from Vanguard DC plans rose in 2006 and 2007, although the absolute level of withdrawals is still quite low. The increase may be correlated with either the emerging home mortgage crisis or broader economic stress among financially vulnerable plan participants.

Source: Vanguard Center of Retirement Research, April 2008

Helping Employees Understand the Pros, Cons of Hardship Withdrawals

Abstract: Some companies offer hardship withdrawals in lieu of loans against the retirement plan. Typically, the withdrawal is processed after the employee requests it with no questions asked. So, how can education be used as a gatekeeper and to help employees become aware of the pitfalls and their alternatives?

Source: Financial Finesse, December 2005

Hardship Withdrawals Give Access to 401k Savings, But at a Cost

Abstract: If you're in a financial pinch, you might be able to tap your 401k for a bailout -- but it could really cost you.

Source: 401khelpcenter.com

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